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  3. American Economic Review
  4. May 2016
  5. Safe Asset Scarcity and Aggregate Demand

Safe Asset Scarcity and Aggregate Demand

  • Ricardo J. Caballero
  • Emmanuel Farhi
  • Pierre-Olivier Gourinchas
American Economic Review
vol. 106, no. 5, May 2016
(pp. 513-18)
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Abstract

We explore the consequences of safe asset scarcity on aggregate demand in a stylized IS-LM/Mundell Fleming style environment. Acute safe asset scarcity forces the economy into a "safety trap" recession. In the open economy, safe asset scarcity spreads from one country to the other via capital flows, equalizing interest rates. Acute global safe asset scarcity forces the economy into a global safety trap. The exchange rate becomes indeterminate but plays a crucial role in both the distribution and the magnitude of output adjustment across countries. Policies that increase the net supply of safe assets somewhere are output enhancing everywhere.

Citation

Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas. 2016. "Safe Asset Scarcity and Aggregate Demand." American Economic Review, 106 (5): 513-18. DOI: 10.1257/aer.p20161108

Additional Materials

JEL Classification

  • E23 Macroeconomics: Production
  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy
  • F41 Open Economy Macroeconomics